Introduction

Organisational transparency through sustainability reporting and Environmental, Social and Governance (ESG) analysis and ratings is growing due to increased stakeholder focus amid the imperative to decarbonise as quickly as possible and achieve the UN’s Sustainable Development Goals (SDGs) by 2030.

Organisations need to refocus strategic objectives and the system scope required to operate accordingly, whether it be to achieve compliance by operating legally or, at the other end of the spectrum, sharing or creating business value for positive impact.

Underpinning these settings is systems design, which provides the functionality to meet end goals. This article discusses some of the characteristics and benefits of four system scopes relevant to business goals. We have learnt from the past year that systems need to be agile and resilient and technological platforms need to deliver their required functions in a dynamic environment.

This means that organisations with systems that extend beyond compliance into assurance, sustainability and positive impact will be better prepared, particularly if sustainability reporting and carbon disclosures become mandatory requirements and/or Australian climate change legislation is enacted. We are already seeing the convergence of sustainability/ESG/climate-related standards and frameworks at the global scale. Good systems lead to good sustainable outcomes.

Which system scope?

Compliance - to operate legally

Compliance reduces an organisation’s exposure to liability by meeting its regulatory requirements. This includes regular reporting to an authority against permit conditions (for example) or submission of public disclosure data and statements as required by law.  

Compliance typically covers the primary activities within the control of the organisation, such as logistics, operations, sales and marketing and after-sale services. It includes focus on workplace safety and environmental issues, such as managing waste and minimising polluting emissions. For corporate entities, compliance can extend to reporting under the National Greenhouse and Energy Reporting Act 2007, if greenhouse gas emissions and/or energy consumption/production thresholds are exceeded.

There are cases where compliance extends beyond the entity’s organisational boundary. Again, depending on whether a threshold is exceeded (in this case, annual consolidated revenue), entities may be required to submit a Modern Slavery Statement, which means understanding and influencing practices within its supply chain.

Assurance - be proactive

The goal of an assurance system is to provide confidence to stakeholders that an organisation is operating according to its strategy and policies to produce products or services of a defined quality. Where compliance provides evidence of legal operation through documented policies and procedures, assurance demonstrates operational effectiveness through a systematic approach to meeting legal, quality, and environmental requirements. Both approaches are risk based but assurance provides additional structure, continuous improvement and opportunity for innovation.

Whether or not to seek certification of an assurance system is an investment decision to be made by the organisation. However, certification against international (e.g., ISO) and Australian standards can enable an organisation to grow with confidence. A good example of the benefits of a certification scheme is Climate Active, which instils consumer confidence by verifying claims of carbon neutrality and disclosing this information publicly.

Assurance may also be applied to voluntary initiatives in other settings, such as CSR and ESG reporting, and some commentators have argued that lack of direction and assurance contribute to problems with sustainability reporting today.

Sustainability – focus on materiality

What does sustainability mean? In a systems sense, it is a ‘state’ of a system - one that thrives within its boundaries and in harmony with external elements. Applied to the business world, it could be defined as a system that enables the entity to develop while managing its environmental, social and governance risks (and opportunities) and meeting stakeholder expectations. At its simplest, it infers minimising the negative environmental impacts of its operations, and increasingly its value chain - from resources and suppliers to end-of-life product disposal.

For businesses that aspire to sustainability, defining their material risks and managing those risks is key to focusing on what matters and assessing its overall system health. A revised definition of a material topic is given by the Global Reporting Initiative (GRI) in its draft Universal Standards:

Material topics are topics that reflect the organisation's most significant impacts on the economy, environment, and people, including impacts on human rights.

Furthermore, GRI has recently reported on research discussing the concept of double-materiality, which encourages judgement from two perspectives (1) understanding the company’s development, performance and position and (2) environmental and social impact of the company’s activities on a broad range of stakeholders.

Climate action (SDG 13), for example, is a material topic for two reasons - failure to act on a foreseeable risk and, conversely, the risk of making a claim (such as a net zero aspiration or commitment) without a reasonable basis. As concluded by Mr Noel Hutley SC and Mr Sebastian Hartford Davis (April 2021):

Accelerating impacts of climate change, and responses to climate change overseas and domestically, are profoundly influencing, positively and negatively, the interests of many Australian businesses. It is now perfectly clear that reasonable directors and firms should foresee these risks. We would caution against any misrepresentation about the steps such directors and firms may be taking in response.

An emerging trend in the sustainability space is the forming of strategic partnerships (which aligns with SDG 17). This collaboration between Vinnie’s Victoria, Telstra, and Deloitte, for example, saw the St Vincent de Paul Society Victoria achieve carbon neutral certification under the Climate Active initiative. It enabled Vinnies to calculate the emissions from their community services, purchase offsets and implement ongoing carbon reduction practices.

Sustainability reporting is an important component and stakeholder expectations are increasing around assurance, progress against science-based targets, and sector metrics. Corporate Citizenship, in their article The Future of Reporting - Corporate Citizenship, expects that sustainability disclosure will become mandatory, with an initial focus on climate change and integration into financial reporting. This is consistent with the uptake of climate-related financial disclosures globally, including a mandatory requirement in Aotearoa New Zealand that acknowledges – “voluntary disclosure regimes have made good progress but are not delivering the rigour and consistency needed by financial markets to fully assess and address climate change risk”.

Therefore, as more companies and businesses realise the value of sustainability reporting and stakeholder engagement as part of core business, there is a convergence of resources, knowledge, and insights across sectors. This is led by unique compacts formed by sustainability and integrated reporting organisations, such as: The Statement of Intent – to Work Together Towards Comprehensive Corporate Reporting by CDP, Climate Disclosure Standards Board (CDSB), Global Reporting Initiative (GRI), International Integrated Reporting Council (IIRC) and Sustainability Accounting Standards Board (SASB).

Impact – maximise positive impact

The intent of systems designed for impact is to apply an organisation’s capital (e.g., financial, human, organisational, relationship) across the activities it carries out to create value for stakeholders, to societal and environmental issues. There are many points of perspective and scale – an impact program could be aimed at a local community issue or the whole organisation’s activities may be aligned with the global Sustainable Development Goals (SDGs).

Two elements common to systems designed for creating change or impact are – (1) identifying opportunities and processes for co-creating value for the organisation, its stakeholders, and potential beneficiaries and (2) implementing processes for measuring, assessing, and improving the impact of these programs. Evaluation should include indicators for discontinuing a program, if it is not achieving its intended impact, for review and learnings and to redirect company resources.

One increasingly prominent pathway for achieving positive impact is through the sustainable finance sector, although it has its challenges. In the article, Overselling Sustainability Reporting, We’re Confusing Output with Impact (Pucker, K.P Harvard Business Review May-June 2021), these challenges include misunderstandings around negative screening, the quality of ESG ratings, and lack of comparability from use of different metrics or standards. On the positive side, this sector is also leading the way in collaboration, as discussed above with regard to harmonised sustainability reporting, and through global initiatives such as the new Glasgow Financial Alliance for Net Zero (GFANZ).

System design

Design reflects the drivers, processes and reporting formats of the system scope and setting. A compliance system needs to be designed with safety, operational integrity, and regulatory compliance in mind. For assurance, the system needs to facilitate the building of stakeholder trust and organisational resilience. A system focused on sustainability enables an organisation to meet customer expectations, interrogate its value chain and implement technological advances to remove or minimise negative impacts. A system for positive impact needs to facilitate problem-solving, collaboration and build societal trust, while managing financial and other resources.

Aspects to consider include identifying sources of information and the tools needed to capture and analyse the data to track progress, adapt where necessary and demonstrate successful achievements. The collected/collated data should respond to stakeholder values, both now and the future.

Depending on its purpose, the system design may be underpinned by architecture that enables an organisation to evaluate, implement and demonstrate its performance. For example, designing for compliance should include a process for training and competency, which could be enabled by a technological solution or tools for documenting training procedures and maintaining records.

Similarly, designing for assurance recognises that auditing is a key element, which can be enabled by a solution with an action plan and tracking functionality. Sustainability initiatives require key performance indicators subject to data analysis over time, while positive impact can be supported by trend analysis to evaluate successes or to redirect resources if something is not working. Some enablers, such as risk management and stakeholder relationship management, should be integrated in all system settings.

To reduce burden, it is useful to think about all the organisation’s reporting needs, whether they are compliance, third party certification or sustainability/ESG and impact reporting, at the outset of a new system design or to integrate and streamline data-driven elements in existing systems for renewed design. Integrated reporting considers the range of capitals relevant to the system intent (such as financial, manufactured, intellectual, human, social and relationship and natural).

Mapping processes to system scope

There are several processes that can be utilised by all system scopes to achieve organisational objectives. Risk management is the first that comes to mind …

A compliance system, for example, reduces the risk of environmental pollution, reputation damage and stakeholder backlash, waste disposal problems, and fines or costs imposed by remediation. It follows that measures such as action tracking and incident management are key processes, despite the reactive nature of incident management.

An integrated assurance system by comparison, supports the development of procedures that ensure workflow through the organisation is scalable and prepared for growth and change. It can also provide greater adaptability in a crisis. During Covid-19 organisations found they needed to reposition staff (e.g., customer service roles), create and produce new products (e.g., IsoKing new products and fundraising), make a fundamental change to working arrangements (e.g., Work from Home, WFH) and make rapid and extensive changes to delivery (e.g., universities moving to wholly online). Processes such as auditing, change management for continuous improvement and building stakeholder relationships, therefore, are key for supporting this type of system.

Continuous improvement can also include innovating or changing the processes or procedures to meet new goals, opportunities, or challenges. Assurance processes do not preclude an organisation from identifying step changes that may lead to new directions. This approach is documented in the standard ISO 56002:2019 Innovation Management. Innovation is also important to the Sustainable Development Goals (SDGs), with Goal 9 – Industry, innovation and infrastructure – acknowledging that investment in this area is critical to driving economic growth.

The benefits of sustainability goals to an organisation and its stakeholders include updated materiality assessments for strategic management, key performance indicators (KPIs) for decision-making, stakeholder trust and relationship capital, increased human and intellectual capital and brand value and insights gained from collaboration and disclosure.

The underpinning processes for this system type include enhancing stakeholder relationships and supplier engagement, data analytics and trend analysis of KPIs, and communication through sustainability reporting or disclosure reports and statements. There are several frameworks for sustainability reporting as discussed previously, and moves are in progress to standardise, so reporting processes need to be flexible and adaptable. This could include digitised sustainability reporting for example, and the ability to create targeted reports for different stakeholder groups.

It is widely held that long-term positive impact is best achieved through an inclusive process of co-creation with stakeholders and beneficiaries at individual and collective levels. It is also posited that impact is an ever-evolving destination, which reflects the need for planned and ongoing dialogue and evaluation. In addition to alleviating a social or environmental problem, the benefits to an organisation and its stakeholders include integration into core business e.g., aligning an entity’s activities with the SDGs and increasing resiliency, potential for attracting investment or funding for for-purpose organisations, and co-benefits from influencing an organisation’s supply chain (e.g., sustainable procurement, Modern Slavery Act). Processes that enable co-creation, identification of environmental co-benefits, and social investment, innovation, or procurement, are key.

It could be argued that compliance and assurance procedures should be in place prior to thinking about social and environmental impact to provide a reasonable basis for future commitments. On the other hand, the creation of positive impact has its own building processes, such as the Theory of Change (typically used by for-purpose organisations), which provides a good framework for organisations in general.

Refresh

Achieving business objectives reflects the outcomes of the whole system, whether it be focused on compliance, assurance, sustainability, or positive impact. However, the global pause brought about by Covid-19 has shone a spotlight on sustainability expectations and reporting trends alongside accelerated technological uptake and digitalisation.

The initiatives by global organisations to harmonise sustainability standards and frameworks should go some way to addressing the lack of mandate in these areas. It is also likely that the trend towards mandatory climate-related financial disclosure will become the norm in key sectors to increase stakeholder confidence.

Organisations can prepare for these coming changes by making sure their system design and underpinning platform are agile, resilient, and data-driven to meet increasing stakeholder needs for integrated sustainability and impact reporting.